Moving Climate Disclosures to the Top of the Corporate and Investor Agenda

On July 11, the Task Force on Climate-related Financial Disclosures convened two public panel sessions in New York with Task Force members and experts from industry and the non-profit sector to discuss what transition risks companies are exposed to and what tools are available for companies to tackle climate risks and opportunities.

Transitioning to a low carbon economy brings both opportunities and risks for companies. Businesses may be required to rethink their strategy or make changes to their portfolios. Climate change-related financial impacts on companies are not currently well understood and measured. Companies are struggling to quantify the impact of climate risks, as panelist Diane Larsen, Audit Partner for the Global Professional Practice at EY pointed out.

There is also a lack of expertise and a need for more data on the financial impacts of climate change. Michael Wilkins, Managing Director and Global Head of Environmental & Climate Risk Research at S&P Global emphasized that companies that do not address climate risks face the danger to be downgraded, which is especially true for resource-intensive industries, such as oil & gas. These industries need to find ways to diversify their portfolios and move away from carbon dependency.

From an investor perspective Eloy Lindeijer, Chief of Investment Management at PGGM explained how PGGM has started to divest from companies that have the highest carbon footprint and provide limited climate-related data. Instead they re-invest in companies that are showing a better performance in their field. Impact investing is on the rise with PGGM quadrupling its work in this field and dedicating up to 20 billion €.

CalPERS’ Investment Director of Global Governance Anne Simpson put CalPERS’ position as a pension fund succinctly ‘that there is nowhere for CalPERS to hide’ given the climate risk exposure across their entire portfolio.

In order to better manage future risks and opportunities, one valuable tool may be scenario analyses, which help to map potential future financial impacts against certain scenarios, such as global warming by 1.5°C, 2°C, 3°C or more.

Steve Lydenberg, Partner for Strategic Vision at Domini Social Investments explained that the ‘best way to think about scenarios is in terms of alternative futures. They are visions of what the future might be, they are not forecasts or predictions, which are the result of someone’s opinion; the result of a model or a single view of a future; but they are in fact a series of different potential futures’.

Mark Lewis, Managing Director and Head of European Utilities Equity Research at Barclays suggested that there is a psychological barrier that exists for people to understand that the world can change drastically. Therefore, the long-term aspect of climate risks can make recognizing the urgency and conducting adequate planning more difficult. Both investors and companies alike are still learning how best to manage these issues.

Creating transparency by adding climate-related disclosures into mainstream financial reports is a first step towards providing better data – one that the Task Force is working on to institutionalize. Climate-related financial disclosures need to be integrated into formal risk management and governance processes, highlighted Curtis Ravenel, Global Head of Sustainable Business & Finance at Bloomberg LP.

Diane Larsen pointed out that the challenge is that ‘corporates don’t like disclosures. Companies struggle with what is the right level of information. How good is that number the moment you put it on paper? What exactly do I need to disclose?’

‘At the moment there is a huge self-selection bias. The companies with the good news have all the incentives in the world to report. Those that are not are probably not the ones you need to be worried about’, Anne Simpson observed. Therefore, it’s time for investors to demand the information they need to make better decisions and drive change from the bottom-up.

Although, this being a global issue that needs to be addressed by companies worldwide, we are seeing different levels of acceptance for instance among major US companies opposed to European ones, Mike Wilkins pointed out.

Comparable, consistent and reliable data will allow investors to have more transparency into companies’ climate risk exposures – not only to understand the risks, but to identify the opportunities in the move to a low-carbon economy, as well.